Roche’s Hostile Bid for Illumina Could Reach $60 Per Share

Investors hoping current $44.50 bid isn't the last

To paraphrase a popular idiom, “Redemption is sweet.” OK, at least partial redemption.

You might recall that this reporter provided a big mea culpa in an end-of-the-year article in which I admitted misfiring about the prospects for Illumina (NASDAQ:ILMN). In an April 2011 article, I had touted the bright outlook for the San Diego-based gene sequencing company, noting that one analyst had even likened the company to Apple (NASDAQ:AAPL).

After the April article appeared, Illumina’s stock performed like Apple’s all right — only in reverse, losing about two-thirds of its value in less than six months. Now it appears Illumina shares might at least return to its April 2011 level of about $70.

That’s because Swiss health care giant Roche (PINK:RHHBY) has made a hostile bid to buy Illumina for $5.7 billion, or $44.50 per share. But industry observers think the Roche offer is a classic case of low-balling, and that it’ll have to dig deeper into its pockets to snag Illumina.

The market certainly thinks so — ILMN shares are trading at more than $10 above the offering price today.

Credit Suisse (NYSE:CS) analyst Vamil Divan thinks it might take a bid of at least $60 for management to agree to turn the keys to the company over to Roche. Roche started buyout discussions with Illumina last December, but the company has rejected a number of offers they thought were too low, according to Seeking Alpha.

Illumina CEO Jay T. Flatley refused to comment on the latest Roche offer, stating that it has to be evaluated by the company’s board of directors, he told The New York Times.

Divan said Illumina owns about 65% of the DNA global sequencing market, which is pegged at about $1.2 billion currently and is expected to reach $2 billion in just two years. Market growth continues to be driven by new technologies that are faster and more economical. The industry’s No. 2 player, Life Technologies (NASDAQ:LIFE), whose shares are up more than 3% Wednesday, plans to seek FDA approval this year for a machine that will cost under $150,000 and be able to sequence an individual genome in a single day for $1,000, the Associated Press reported earlier this month. Previously, the cost was $5,000 to $10,000 and the time required was weeks or even months.

Illumina already has said it plans to introduce a system competitive with Life Technologies’ later this year.

Although sequencers have the promise to open up new ways to attack cancer and other diseases, the market for them has cooled recently. Up to now, academic researchers have been the biggest customers for the machines, and they’re suffering budget crunches due to reduced government funding.

Still, Roche seems intent to improve its No. 3 position in the market by acquiring Illumina. The big question is: How much is it willing to pay?

“We expect this current effort will be similarly long and drawn out absent a substantial increase in Roche’s offer,” he said.

So could a white knight ride in and whisk Illumina from Roche’s grasp? Although Leonard doesn’t think so, names of potential suitors that have been mentioned include General Electric (NYSE:GE), AbbottLaboratories (NYSE:ABT) and Thermo Fisher (NYSE:TMO), according to Seeking Alpha.

As of this writing, Barry Cohen did not hold a position in any of the aforementioned stocks.